Journalist

Iron ore is still down nearly 30 per cent since the start of the year. Photo: Nick Cubbin

The iron ore price bounced back overnight as Chinese steel mills dipped into the market, but observers are not convinced the bulk commodity has found its bottom.

The spot price for iron ore jumped 2.2 per cent to $US94.60, moving further away from a 20-month low hit on Friday. The commodity is still down nearly 30 per cent since the start of the year.

The spot rise came on the back of cargo purchases from Chinese mills, traders said. The purchases remained relatively small due to the oversupply of iron ore in May.

"Mills are purchasing cargoes in small lots because they are not too positive about the future market for steel", an iron ore trader in Tianjin told Reuters.

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Slow demand from Chinese steel mills combined with an abundance of new supply hitting the market has been weighing on prices.

A recent Goldman Sachs report predicted that the price of iron ore could fall to $US80 a tonne on the basis of continued oversupply with demand growing at a slower pace.

Fortescue founder and chairman Andrew Forrest also believes that the Iron ore price "could wander down to $US80" but also that it "could wander up to $US140". Mr Forrest told Bloomberg he'd be comfortable with a price that oscillates around $US110.

Meanwhile, Rio Tinto Sam Walsh told Bloomberg on Wednesday that he suspected a price "level somewhat north of $US100 is more realistic."

Australia iron ore miners have been ramping up production over the past months and exports from Port Hedland in Western Australia hit a record 29.9 million tonnes in May.

The national account figures released on Wednesday revealed that 80 per cent of growth in the Australian economy for the first quarter of 2014 was contributed by the mining industry.

This figure looks set to grow with BHP and Fortescue tipped to export significantly more in the June quarter than in the March quarter.

The lift in local production could permanently squeeze out higher-price Chinese operators, a commodities report from ANZ states. "Expanded Australian iron ore exports are coming on quicker than expected which could trigger permanent closure of high cost Chinese iron ore supply"

"Our view is that current prices look oversold with a 10 per cent to 15 per cent rebound likely in the coming months," said ANZ's head of commodity research, Mark Bevan. "Traditional indicators such as the cyclical decline in steel inventories, and improved manufacturing activity in China are supportive of a price rise."